Shares of HollyFrontier (HFC) dropped a quick 10% as trading got underway on May 5. The oil refiner's premarket earnings release was the likely driver of the negative mood. And perhaps for good reason.
Ever since the coronavirus pandemic erupted, the energy industry has been struggling with reduced demand. Although vaccines have led to an uptick in economic activity, and thus a demand rebound, the industry is still not quite back to a supply/demand equilibrium. Refiners like HollyFrontier have been at the leading edge on the demand issue, since their products, like gasoline and jet fuel, have been center stage thanks to reductions in travel related to social distancing and closures of nonessential business.
Analysts were clearly aware of the pressures facing HollyFrontier, offering up a first-quarter 2021 consensus estimate of a $0.45-per-share loss. However, when the final tally came in, the company's adjusted loss was $0.53 per share. That's exactly what it lost in the first quarter of 2020. Although management highlighted strong results in its lubricants business, the refining segment generates roughly six times the revenues. And refining continued to struggle, hampered by weak realized margins and higher costs. Management didn't offer any guidance as to when things might start to improve in the earnings release, either, saying only that it was looking to safely build out its renewable projects over the summer.
Refiners tend to have fairly volatile businesses, since they effectively make the difference between the price of oil and the prices of the products into which it gets turned. There's a lot of price fluctuation on both sides of that equation. HollyFrontier is muddling through as best it can, noting that it also had to deal with a massive winter storm that shut down vast swaths of Texas in the first quarter, but times still appear to be tough. Most investors looking at the energy sector would probably be better off considering an integrated energy company with a more diverse business, including both upstream (drilling) and downstream (chemicals and refining) operations. Chevron or ExxonMobil, which both roared back into the black in the first quarter thanks to their drilling operations, would be good starting options.